A Patient Engagement Pilot

If I could do one pilot to show how healthcare needs to change, this is what I would do . . . (See my next post for the nuts and bolts of how this could be implemented.) (P.S. I know this isn’t of general interest even to people interested in health policy, but I wanted it to be available to the world, so here it is.)


  • Remove barriers to patients being able to choose the highest-value providers, which will reward those providers financially for being higher value and encourage lower-value providers to innovate to improve their value as well


  • Initially, the pilot will only focus on a single care episode (for example, hip replacements)

Two Core Design Principles of the Pilot

  1. Uniform incentives for providers
  2. Engage patients to use quality and price when choosing among providers

How These Principles Will Be Implemented

  • All payers (public and private) will be encouraged to participate inasmuch as regulation allows (see the note on Medicare and Medicaid participation below)
  • Payers and providers will participate in determining the care episode to be tested, what services will be included in that care episode, and which quality metrics will be reported by all participating providers
  • Providers will report the standardized quality metrics, which will be made available for patients to view on _____.org (this website needs to be a widely known one-stop-shop for patients to get information on healthcare providers’ quality)
  • Payers and providers will amend contracts (if needed) to reimburse for the care episode via episode-based pricing; capitated contracts could also work, but there are issues*
  • Payers will adjust cost-sharing requirements for the care episode to allow patients to bear all or part of the price differential between providers (by having patients pay less out of pocket when they choose lower-priced providers and/or by having them pay more out of pocket when they choose higher-priced providers) (for example, reference pricing or different copay tiers)
  • Payers will also have mechanisms to assist patients who need help understanding these plan benefit changes

Predicted Impacts of the Pilot

  • Short-term effect: More patients will choose higher-value providers (lower prices and/or higher quality) because they will have price and quality information and will have cost-sharing incentives to use that information when they make decisions among providers
  • Long-term effect (will have a more significant impact on value): Providers will be assured profit increases via increased market share if they can innovate to raise their value relative to competitors, so provider-led value-improving innovation efforts will increase
    • To be able to observe this long-term effect, we need to choose a care episode that is complex enough and variable enough in its cost and outcomes that there is a significant opportunity for care redesign to improve value (e.g., hip and knee replacements, coronary artery bypass grafts)

Why Broad Participation Is Key

  • Without the majority of patients being engaged in this way, providers’ potential market share rewards for value improvements may be insufficient to spur innovation efforts
  • If payer reimbursement policies are not uniform, providers’ value-improving innovations may result in reimbursement reductions (and, therefore, opposing incentives) from non-participating payers
    • e.g., a provider redesigns post-surgical knee replacement care and reduces readmissions within 90 days by 50%; that provider will still receive the same amount of reimbursement from participating payers, but it will lose a substantial amount of revenue from non-participating payers, and this revenue reduction could be enough to dissuade providers from doing these care redesigns

Pilot Evaluation

  • Data from an all-payer claims database will be used to track the average total price of the care episode in the market
  • The pilot’s standardized quality metrics will be used to track to average quality of care

A Note on Medicare and Medicaid Participation

  • Regulations on cost sharing for publicly insured patients will limit the ability for public payers to amend cost-sharing requirements; but, for the sake of providers having uniform incentives, public payers are encouraged to still participate by at least amending contracts with providers to reimburse them in the ways described above
  • Public payers can be rewarded for pilot participation because they can set prospective prices at historical averages minus 2%, and providers will most likely be willing to accept the slight price reduction because it will be more than compensated for by the fact that they will get to keep all the savings they generate through their cost-lowering care innovations

* I won’t get into them now, but the issues have to do with the dilution of incentives caused by one party doing a lot of work to innovate and then having to share the benefits of that innovation with everyone in the organization. Would you do extra chores if your parents split the extra allowance you earned between you and all your siblings?

What Is an ACO? What Is a Medical Home? What Is Bundled Billing? What Is P4P?

Image credit: shutterstock.com
Image credit: shutterstock.com

Our healthcare system is currently in experimentation mode–we are trying thousands of experiments to figure out how providers can be rewarded for “value instead of volume.” All the new terminology and reimbursement ideas accompanying these reforms can be hard to keep straight if you’re not steeped in this stuff every day, but guess what? There aren’t actually that many different ideas being tried; there are just a bunch of the same ideas being tried in various combinations. First I’ll describe those four basic ideas, and then I’ll show how they are the building blocks of all the main payment reform experiments out there.

Quality bonus: Give a provider more money when he hits performance targets on whatever quality metrics are important to the payer.

Utilization bonus: Utilization metrics and quality metrics are not usually separated, but they should be. Here’s the difference: improved performance on a quality metric increases spending; improved performance on a utilization metric decreases spending. They both improve quality, but they have different effects on total healthcare spending. So, for example, ED utilization rates and readmission rates would be considered utilization metrics. And childhood immunization rates and smoking cessation rates would also be considered utilization metrics because they tend to be cost saving. Insurers love giving providers bonuses on utilization metrics because they are stimulating providers to lower the amount being spent on healthcare.

Shared savings: If a provider can decrease spending for an episode of care (which could be defined as narrowly as all the care involved in performing a single surgery or as broadly as all the care a person needs for an entire year of chronic disease management), the insurer will share some of those savings with him.

Capitation: The amount a provider gets paid is prospectively determined and will not change regardless of how much or how little care that patient ends up receiving. Again, this could be defined narrowly, such as all the care involved in performing a single surgery (in which case it’s actually called a “bundled payment”), or it could be defined broadly, such as for all the care a person needs for an entire year.

By the way, did you notice that shared savings and capitation are almost the same thing? The only difference is who bears how much risk. In shared savings, the risk is shared, which means that if the costs of care come in lower than expected, the insurer gets some of the savings and the provider gets some of the savings. In capitation, the provider bears all the risk, which means that if the costs of care come in lower than expected, the provider gets all of the savings.

Okay, now that I have listed out those four ideas, take a look at the popular payment reforms of the day . . .

Medical Home

General idea:

  • Give a primary-care provider a per member per month “care management fee” (in addition to what he normally gets paid) for providing additional services (such as care coordination with specialists, after-hours access to care, care management plans for complex patients, and more)
  • Also give the primary-care provider bonuses when he meets cost and/or quality targets

Breaking down a medical home:

  • A care management fee is actually a utilization bonus (because the net effect of the provider offering all those services is to avoid a lot of care down the road)
  • A bonus for meeting quality targets is either a quality bonus or a utilization bonus depending on the specific metrics used
  • A bonus for meeting cost targets is shared savings

Accountable Care Organization (ACO)

General idea:

  • Give a group of providers bonuses when they lower the total cost of care of their patients (but the bonuses are contingent upon meeting quality targets).

Breaking down an ACO:

  • A bonus for lowering the total cost of care is shared savings
  • When a bonus is contingent upon meeting quality targets, that means it’s also a quality or utilization bonus (depending on the specific quality metrics used)

Pay for Performance (P4P)

General idea:

  • Give a provider bonuses when she meets quality targets.

Breaking down P4P:

  • This is either a quality or utilization bonus (depending on the specific quality metrics used), but it tends to be utilization bonuses because insurers especially like when providers decrease the amount of money they have to fork out

Bundled Payment/Episode-of-care Payment

General idea:

  • Give a group of providers a single payment for an episode of care regardless of the services provided.

Breaking down bundled payment:

  • A bundled payment is a narrow form of capitation

There you have it. They are all repetitions of the same ideas but combined in different ways.

How to Change How Prices Are Set in Healthcare

Image credit: shutterstock.com
Image credit: shutterstock.com

In my previous post, I described the three ways prices can be set in healthcare: administrative pricing, bargaining power-based pricing, and competitive pricing. I also bemoaned the fact that the prices paid to providers by private insurers are determined more by relative market share than by anything else* . . . but this post explains how we can change all that.

I see two possible pathways from bargaining power-based pricing to competitive pricing, so here they are.

First Pathway

Let’s pretend a colonoscopy clinic is super innovative in how they do things, and they eventually are able to lower their costs by 20%. This is great for them because the prices they are paid by insurers has stayed the same (remember, those prices are determined primarily by relative market share, not costs), so now they have a really solid profit margin. And yet, the managers of this clinic still aren’t satisfied because they have excess capacity they want to fill.

One day, the managers come up with an idea. They say, “Up to this point, we’ve always maximally leveraged our bargaining power with insurers to win the highest prices we possibly can, but what if we do something radically different? What if we offer to lower our prices by 10% in exchange for the insurers putting us in a new, lower-copay tier? This would induce way more of their policy holders to choose us for their colonoscopies, so we’ll fill up our excess capacity. And, according to our calculations, our increased volume will more than make up for the lower prices. So everyone wins! Our profit increases, the insurer saves money with the lowered prices, and the patients are happy because their copays are less as well.”

Soon, some of the clinic’s competitors would figure out why their volume is starting to drop, so they would probably find a way to offer lower prices to get put into that lower-copay tier as well. Competitors who can’t or won’t lower prices will slowly lose market share until they, too, are forced to either lower price or improve quality enough to convince patients that going to them is worth the extra money.

Voila! Competitive pricing.

I have a friend who manages a large self-insured employer’s insurance plan, and I asked him what he would do if a clinic came to him offering lower prices in exchange for steering more employees to it. He said as long as the provider can show that quality won’t go down with the additional volume and that wait times for appointments won’t increase, he’d probably go for it.

Now, of course this wouldn’t work with every kind of healthcare service. I purposely chose a non-emergency service that already has pretty straightforward pricing. But as a priori quality and pricing information becomes more available, more services will be candidates for this pathway to competitive pricing.

One other point: Hospitals generally do a horrible job of cost accounting (they’re just such complex organizations!), so they usually have no idea if a proposed price reduction will still be profitable or not. Thus, they’ll be left behind in this game until they start to develop better cost accounting methods. If they have some foresight, they’ll start fixing that now.

Second Pathway

An insurer is despairing the fact that many of the providers in the region have combined into a single price-negotiating group, so now the insurer is stuck paying way higher prices than before. But then some health policy-savvy managers figure out a solution. They say, “Let’s implement reference pricing for a bunch of non-emergency, straightforward services. Let’s start with colonoscopies. This is how it works. We’ll tell our policy holders that we’ll put $1,200 toward a colonoscopy (the “reference price”). If a policy holder chooses a provider who charges more than that, they will pay everything over that price. A few clinics in the area offer prices that are lower than $1,200, so policy holders will still have a few options if they don’t want to pay a dime. But, (and here’s the best part) the price the providers in that huge price-negotiating group forced us to accept is $3,000, so they’re definitely going to lose a lot of volume, which will probably force them to lower their price.”

Soon other insurers jump on the reference pricing bandwagon and higher-priced providers who are losing tons of volume will be forced to price competitively.

In conclusion, shifting to competitive pricing is not immediately possible with most healthcare services. But the way to make more healthcare services amenable to competitive pricing is to improve a priori quality and pricing information: quality information needs to be standardized and more relevant to the factors patients should be considering when they’re choosing between providers, and the full price of an episode of care needs to be available beforehand so patients can compare them apples to apples. Only after these changes happen will we be able to rely more on competitive pricing, which, most importantly, will do more to stimulate value-improving innovations in our healthcare system than almost anything else.

* I also complained about how administrative prices don’t encourage (and actually stifle) innovation toward higher quality and lower prices. Check out the Uwe Reinhardt quote in this blog post and then think, “Uwe must have been reading Taylor’s blog.”

The Three Different Ways We Could Set Prices in Healthcare

Image credit: AP Photo/Damian Dovarganes
Image credit: AP Photo/Damian Dovarganes

Out of the three general ways we could set prices in our healthcare system, one is best. Too bad we’re using the other two.

First, I’ll describe each method:

  1. Administrative pricing: This one is very straightforward. The government says, “For procedure A, healthcare providers will be paid X dollars.” Usually the methods for coming up with that dollar amount are sophisticated and rely on the best available data, but not always because they are subject to various political influences and government budgets.
  2. Bargaining power-based pricing: This one is easiest to explain using an example. Think of a small town with only two family medicine docs. One, Dr. Awesome, treats 90% of the town’s residents; the other, Dr. Mediocre, treats the other 10%. All patients are insured by one of four different private insurers, each of which has approximately equal market share. Now think of Dr. Awesome sitting down at the bargaining table with one of the insurers to decide on prices. He says, “If you don’t pay me at least Medicare rates times 1.4, I won’t accept your insurance. I’m serious, I won’t accept anything less.” And the insurer says, “Hey, that’s a horrible deal, but if we stop covering care you provide then most of our policy holders in your town will just switch to one of our three competitors and we’d lose out on even more profit!” Now think of the conversation between Dr. Mediocre and that same insurer. Dr. Mediocre says, “Pay me Medicare rates times 1.4.” And the insurer responds, “No. We’ll pay you Medicare times 0.8. If you say no and we don’t have you listed as a provider in our network anymore, that’s okay because only a tiny percentage of our policy holders are your patients. And we know that you don’t have many patients, so you can’t afford to risk losing 1/4 of them by saying no to the price we offer.” Relative market share between the two parties is the primary determinant of bargaining power, so a bigger market share means you can get a better price.*
  3. Competitive pricing: This is the method used to determine prices in almost every other industry. Here’s basically how it plays out: Competitor A says, “Everyone knows that our product has similar quality to our competitor’s product, so we can’t price it higher than theirs without sacrificing quite a bit of market share. We could sell it for less than theirs to win more market share, but then the price is perilously close to our costs, so we’ll have to do some math to see what the profit-maximizing price/market share combination is likely to be.” Note the one huge condition that is required for this to work: Potential customers must be able to compare the price and quality of all their options, which is starting to happen more and more as better quality information is starting to become available and as prices are becoming more transparent.

Our healthcare system currently relies primarily on number 1 (think: Medicare and Medicaid) and number 2 (think: private insurers and providers setting prices with each other). But which method is best?

If you want to have the lowest possible prices, administrative pricing is the obvious best choice. But that’s only for the short term (as you’ll see), and it does nothing to encourage quality improvement unless you start getting into the treacherous area of performance incentives.

The only thing I’ll say about bargaining power-based pricing is that I don’t like it. I’d rather not have prices that are totally unrelated to costs or quality and instead are determined by relative market share.

Now let me tell you why I like competitive pricing so much. I want our healthcare system to deliver better value right now (Value = Quality / Price), and even more than that I want that value to go up over time as providers and insurers innovate in ways that allow them to decrease prices, increase quality, or both. Competitive pricing is the only method that provides an incentive for competitors to innovate because it rewards the highest-value offerings with increased market share and profit. The other two options don’t do that, which seems like a pretty big downside, don’t you think? I’d be willing to forgo short-term super-low administratively set prices in favor of stimulating innovation that will improve value way more over the long term.

In my next post, I’ll explain how we can shift from bargaining power-based pricing to competitive pricing.

* Do you ever hear those arguments that if public insurers lower their prices any more, providers will just raise their prices for private insurers? Well, now you know why those arguments are mostly hogwash. Providers are already leveraging their relative market share to get as high prices as possible from private insurers, and getting paid less by public insurers doesn’t change that relative market share.

How Backward Integration Is Starting to Fix Healthcare Delivery

A good friend just told me about Montana’s state-run clinics that are only for state employees. Going to the clinic is free for state employees, which means the state is paying for everything. And yet, despite paying for everything, the clinics are doing such a good job of managing diseases that the state is actually saving more money than it’s spending on the clinics.

I’ve talked about the importance of cost-saving prevention before, but my point in describing this example is to illustrate a growing trend in healthcare–a trend that is largely unrecognized, but is starting to fix healthcare. So let’s break it down.

Think of the Montana state government as a company. This company, just like most companies, has suppliers that sell it critical inputs it needs to perform its services. And one of the most important suppliers to this company isn’t obvious: healthcare providers. Think about it–they are supplying the healthcare that keeps employees productive, which is surely a critical input.

And here’s the interesting thing about the relationships companies have with their suppliers: if the supplier’s product is too expensive, or isn’t good enough in some way, companies will sometimes just take over the production of that critical input themselves. This is called “backward integration.” Think of all the ways employers are backward integrating into healthcare, whether it’s having their own salaried physicians or working closely with providers to redesign care processes; they’re all variations on the same theme.

But employers aren’t the only ones with a supplier-buyer relationship with healthcare providers. Insurers depend on providers to supply the healthcare they are guaranteeing to their customers. So are insurers backward integrating as well? YES. Any time an insurer joins up with a provider, it could be seen as an attempt by insurers to backward integrate (ahem, ACOs). And insurers are also going crazy trying all sorts of hands-off approaches to backward integration (if it’s hands-off, can it still be called backward integration?) with things like pay for performance, bonuses for starting medical homes, and probably hundreds of other experiments I’ve never heard of. They are all attempts to exert some degree of control over the unsatisfactory supplier. Or, in other words, to fix healthcare delivery.

So, I guess we could say that employers and insurers are fixing healthcare delivery. Strange, isn’t it?

[Update: This is good and all, but there are only so many innovative things a single provider can develop, which is why an even better (system-wide) solution would be to do the following: get patients to choose the highest-value providers, which then rewards those highest-value providers with market share, which creates an incentive for all providers to be innovating to win more patients. This idea is expounded more in other posts on this blog. Anyway, in the meantime, this backward integration thing is a great alternative.]

If We Lower Total Healthcare Spending, Who Will the Money Come from?

Image credit: academyhealth.org
Image credit: academyhealth.org

At the recent AcademyHealth Annual Research Meeting in Baltimore, I went to a session on the accomplishments and challenges of community collaboratives. A community collaborative is a pretty cool idea that goes something like this: for a specific community (i.e., city), let’s get all the leaders of the providers and payers in a room (plus a bunch of other stakeholders committed to improving health) and make some decisions collaboratively on how we can fix healthcare in the community. The Robert Wood Johnson Foundation has provided the money to make these things happen in 20 different communities in the U.S. (see Aligning Forces for Quality, and Value-Based Payment Reform).

Sounds like a great idea, right? Well, an interesting challenge has arisen. More and more, these collaboratives are expected to find ways to reduce the total healthcare spending in that community. But so far, they’ve pretty much failed miserably. Why? Well, think about it. Here are all the leaders of payers and providers in that community sitting in a room together saying, “We need to reduce total spending,” but the savings are going to have to come from someone in that room, and none of them are going to say, “Sure, my organization will take one for the team! I’ll have to cut everyone’s pay, but because it’s for a good cause, they’ll love it.”

Does this mean these kinds of collaboratives are utterly useless in terms of lowering total spending in communities? That was the question I (carefully) asked at the end of the session, and one of the panelists gave a really insightful answer. To paraphrase/translate/elaborate on what he said, his answer went something like this:

Yeah, we’re not going to convince anyone in that room to just give up money like that. But what we can do is come up with standardized ways of reporting prices and quality. And when those are standardized across all payers and providers, patients will be better equipped to choose higher-value payers/providers, which, in the U.S., usually means ‘cheaper’ payers/providers. So this standardization will allow total spending to go down by getting more people receiving services from cheaper competitors. Thus, the higher-priced competitors will be the ones who are losing money when total spending goes down, all because we helped standardize quality and price reporting.

I agree. There are still many barriers to getting patients to choose these “higher-value” providers/payers, but this would help solve one of the biggest ones. And with each barrier we overcome, more patients will be enabled to receive higher-value care, which is what everyone wants, right?

Should We Regulate Prices of Hospitals? All-payer Rate Setting’s Allure

Image credit: time.com

The Bitter Pill article has received a lot of press lately. People reading it have often turned to a simple solution: regulate prices. The most straightforward approach to this is called “all-payer rate setting,” which has been experimented with before in some places in the U.S. and is still used in Maryland. The basic idea is that the government says, “When any provider performs this certain service, he/she will be paid this much for it no matter who the payer is.” And they set prices for every single service. Think of how this would instantly make all chargemasters a thing of the past. And no more worrying about hospitals increasing their bargaining power as they join together to form ACOs. And all that administrative complexity that would be gone (thus decreasing costs a fair amount)!

But there are downsides, too, which are not as obvious and may lead people to jump on the bandwagon of all-payer rate setting ignorantly. First, back to basics:

Total spending on healthcare = price * quantity

Yes, we probably have some quantity problems (running too many scans, etc., which regional variation literature attests to quite thoroughly), but the main reason we spend so much more than other countries is because of the prices. So, here’s the prices equation:

Price = Cost + Profit

What’s making prices too high? Brill makes a strong case that, at least in a lot of hospitals, profit is part of the problem [Update: Turns out most hospitals lose money on average, so it’s not as big of a deal as we thought]. But what about costs? Is the actual cost of care too high as well? YES, costs are the major problem, as shown by looking at the average profitability of healthcare organizations. More evidence of this: even in countries that do a pretty good job minimizing unnecessary services and regulating profits to reasonable levels, healthcare spending growth is still unsustainable, which only leaves cost as the primary culprit. Therefore, any policy (whether it’s meant to regulate profits, improve access, improve quality, or whatever) that creates barriers to cost lowering should be reserved as a last resort.

So, would all-payer rate setting create a barrier to cost lowering? If yes, I don’t like it. If no, let’s consider it.

First, since I’m reading The Wealth of Nations lately, let’s ask Adam Smith what he thinks about the subject:

I shall conclude this long chapter with observing, that though anciently it was usual to rate wages, first by general laws extending over the whole kingdom, and afterwards by particular orders of the justices of peace in every particular county, both these practices have now gone entirely into disuse.

By the experience of above four hundred years [says Doctor Burn] it seems time to lay aside all endeavours to bring under strict regulations, what in its own nature seems incapable of minute limitation: for if all persons in the same kind of work were to receive equal wages, there would be no emulation, and no room left for industry or ingenuity.

Particular acts of parliament, however, still attempt sometimes to regulate wages in particular trades and in particular places. (Emphasis added)

What’s he trying to say? All-payer rate setting would leave “no room left for [cost-lowering] industry and ingenuity”? (If you’d like to see my explanation for why I assume innovations by providers are generally cost-lowering, see here.)

I’ve explained before how taking away the freedom to set your own prices also removes much of the rewards for cost-lowering industry and ingenuity. In short (and simplified), lowering costs without sacrificing quality means you can lower prices more than others and therefore offer higher value than others, and higher value will eventually be rewarded with market share and profits. (Another assumption I’m making: patients preferentially choose higher-value providers, which is starting to be more true, but there are still many barriers to it.)

Back to the big picture: All-payer rate setting reduces the potential rewards for cost-lowering innovations, which I can guarantee will reduce the amount of cost-lowering innovation that goes on. So, yes, all-payer rate setting will be a barrier to cost-lowering innovation. And that’s a huge problem, so let’s look for other ways to fix egregious profits and costs. More to come . . .